Last year was a good one for Shopify (SHOP 1.11%) and, by extension, its shareholders. The stock more than doubled in value in 2023, following a turnaround effort that began in response to the previous year's sell-off.
But shares are still miles away from revisiting their 2021 peak.
Before plowing into this seemingly bullish pick, you might want to rethink it. While there's still buzz surrounding Shopify stock, questions are starting to surface about its ultimate potential.
The world was ready for Shopify when it was ready for the world
Shopify helps companies of all sizes establish their own e-commerce presence. Amazon was the go-to platform for many major brands in the earliest years of its existence, but the online marketplace is now a victim of its own sheer size.
There are also conflicts of interest with its third-party sellers -- the company competes against many of them with its own Amazon-branded products. But sellers who use Shopify's e-commerce technology "own" their online customers' entire shopping experience.
Shopify revenue is up 27% through the first three quarters of last year, on the way to a full-year growth rate in the "low-to-mid twenties". Analysts are calling for comparable top-line growth all the way through 2028, in fact.
Earnings are growing too -- a lot. The same analyst community expects per-share earnings to reach $1.07 this year before swelling to $2.35 in 2028.
Data source: StockAnalysis.com. Chart by author.
It's this past and projected growth that's stoked so much investor interest since Shopify's 2015 initial public offering. While shares have dished out some serious swings in the meantime, the stock is still well up over that time frame.
The thing is, all of this stock's biggest sustainable gains could be in the rearview mirror.
The all-important euphoria is wearing off
Shopify is a solid company. It's also profitable (again) and apt to remain so indefinitely. It's going to be around well into the distant future.
But the stock might already be fully valued relative not just to this year's expected earnings but also based on its anticipated earnings going all the way out to 2028. As it stands, Shopify trades at 35 times its projected bottom line in 2028, while the S&P 500 is only valued at 22 times this year's expected earnings.
But companies are more than just numbers, and plenty of stocks have rallied despite frothier valuations. The aforementioned Amazon comes to mind.
The older and more familiar a company gets, however, the less willing the market is to price its stock at a steep valuation. Relative growth tends to slow down as an organization's size grows.
Investors also just get bored with a once-hot story stock and begin looking for more exciting prospects. That's where Shopify arguably is now. The market became enamored with it during and because of the pandemic, but it's the same company now that it was then. There's nothing new to keep the euphoria alive.
Just within the past couple of months, the stock has suffered three different analyst downgrades largely due to valuation concerns. Wedbush analyst Scott Devitt and JMP Securities analyst Andrew Boone also agree that the opportunities to improve profitability will remain limited for the foreseeable future.
And even without these recent downgrades, the analyst community has its concerns. Although shares are still rated as "overweight", over half of the analysts keeping tabs on Shopify only rate it as a hold.
Should you buy?
It's easy to worry too much about the analyst consensus, so make your own judgment call on the stock's rating and recent downgrades. Also, don't dismiss the market's unquantifiable factors that can affect a stock's price, which can change as a young company evolves into a more mature one. A company's flaws can eventually become too hard to ignore, and that alone can prevent a stock from sustaining its rally.
But if you're still a fan of Shopify, that's OK. It remains a solid company with a compelling growth runway for its business, even if the stock's runway isn't quite as compelling. You'll just want to keep your overall expectations in check and wait for dips to initiate or add to a position.
If you're seeking high-risk, high-potential growth stocks, though, Shopify has more risk than potential. You could be better off exploring other options.
